Trading: go long John Laing
Infrastructure specialist John Laing is an efficient operator with room to grow, says Matthew Partridge.
The infrastructure specialist is an efficient operator with room to grow
One of our winning positions last year was in John Laing Group (LSE: JLG). We bought it in March 2017 (issue 836) and then sold it for a modest profit around six months later. In retrospect we would have been wiser to stick with it, since it has continued to rise over the past 15 months and currently stands at roughly 322p.
While it's never a good idea to jump back into a stock solely because you missed out on some good returns, there are solid reasons for recommending this company (which should not be confused with the John Laing Infrastructure Fund, now delisted after being taken over last September).
One reason we like this firm is that its involvement in infrastructure projects, especially those in the transport and environmental sectors, shield it from the impact of a possible economic slowdown: there is a general consensus that more money needs to be invested in infrastructure in both Britain and the US.
The slowing of the US economy may prompt Trump to bolster growth by making good on his pledge to upgrade America's infrastructure. It will be easier to get road and rail projects through the new Congress than further tax cuts.
Even if governments don't increase infrastructure spending, John Laing has been able to grow the amount of business it does, helped by a shift away from the UK, which now accounts for only a third of revenue, compared with 50% three years ago. By the end of this year revenue is expected to have increased by 44% from $233m in 2013 to $336.5m an annual increase of 7% a year. It is currently bidding for a wide range of ventures, from solar farms in Australia to the Silvertown Tunnel beneath the River Thames. John Laing is also good at deploying funds efficiently, with a return on invested capital of 11.2%.
There is always a risk that John Laing Group could loosen its standards or bid too aggressively in an attempt to win additional contracts, thereby failing to make money from the additional work. However, its impressive return on capital suggests it is unlikely to fall into this trap. The company also looks attractively valued at 7.6 times 2019 earnings. So we'd suggest you go long on John Laing Group at £6 per 1p at the current level of 322p (compared with IG Index's minimum stake of £1 per 1p). We'd put the stop-loss at 237p, giving you a maximum downside of £500.
How my tips have fared
These past two weeks have been turbulent for our portfolio as well as the markets. As you might expect given the slump in the value of the UK market, five of our seven long positions fell, with only two defying the broader market decline.
Premier Oil was the worst performer, falling from 107p to the current price of 82p. If you had taken our advice to take out a stop-loss at 88.5p, you would still have had to close out the position at a loss of £900. The only two rising positions are Greene King, which went up to 504p from 499p, and Shire, which rose from £45.57 to £46.07.
The good news is our short positions have done much better. Bitcoin is down to $4,357 (from $6,404), making us a cumulative profit of £1,717. Netflix has also fallen to $271 (from $315), Twitter has declined to $31.98 ($34.02) and Snap is now trading at $6.01 (from $6.90). Just Eat has experienced a dramatic fall from 626p to 531p. However, both Tesla and Weis bucked the trend, with Tesla rising to $353 (from $261) and Weis going up to $46.53 (from $44.60). Both Tesla and Weis are costing us £280 and £253 respectively, with the rest in profit.
At present our profit on the shorts of £2,567 marginally eclipses the losses on the longs of £2,256. Still, we think that it's time to reduce the overall number of holdings.
Premier Oil has already fallen below the level at which the stop-loss was triggered, automatically closing the position. Since it has been six months since we recommended buying Redrow and it's making a loss of £392, we think you should close that as well.
In addition, we're going to reluctantly recommend that you close Tesla at a loss of £280 and reduce the stop-loss on bitcoin to $6,250.
Trading techniques: Stock splits
Stock splits occur when a company decides to replace (or "split") existing shares with multiple shares. For example,in a two-for-one split, current shareowners will have their shares replaced with two new ones.
In theory, the price should adjust to take account of the split, implying that a two-for-one split of a share trading at 100p should lead to each new share trading at 50p. Stock splits are seen as a bullish sign. Usually companies only split their shares after a period of price appreciation to stop individual shares from becoming too expensive to ordinary investors (which would make them less liquid).
A split is therefore seen as a sign the management is confident the share price will continue to rise. Some traders like to buy shares that have just split, and sell shares that have undergone a reverse split (where a company replaces existing shares with a reduced number of new ones).
The evidence suggests that investors can indeed make money by buying shares that have just split. For example, a 2001 study by David L Ikenberry of Jones Graduate School of Management and Sundaresh Ramnath of the McDonough School of Business found that for American stocks between 1988 and 1998, newly split shares made an average return of around 9% in the year after the division.
The effect is visible outside America, too. A 2006 study by Steven Shuye Wang, Leung Tak Yan and Oliver Meng Rui found a similar result for the Hong Kong stockmarket between 1980 and 2000.